MutualFundWire.com: Brokerage Sues Reserve over Alleged 'Tip Offs'

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Monday, September 22, 2008

Brokerage Sues Reserve over Alleged 'Tip Offs'

Ameriprise just accused the Reserve of tipping off large money-fund investors before the Primary Fund broke the buck.

For the full story on the the death of the Reserve and its Primary Fund, see MFWire's timeline.

A spokeswoman for the Reserve was not immediately available to comment.

Ameriprise sued the The Reserve, and chairman Bruce Bent, on Friday over claims that the company tipped off large institutional investors, but not small investors, that its Primary fund was about to break the buck. Ameriprise said it was necessary to file the suit to protect the interests of its retail investor clients.

In the complaint, Ameriprise and Securities America reveal that they don't know which institutional investors received the advance warning.

Their complaint centers on interactions that Ameriprise's employees allegedly had on Thursday with two Reserve employees. Ameriprise claims that the Reserve's chief investment officer, Patick Ledford, and head of sales John Drahzal revealed that The Reserve had tipped institutional investors about the fact the fund was going to break the buck on Monday, and then seemed surprised that Ameriprise had not been tipped as well.

On Friday US District court judge Paul Magnuson granted the temporary retaining order sought by Ameriprise to bar The Reserve from accepting any redemption requests outside of their original exemption that the company previously laid out.

More details are expected in a hearing scheduled for 9:30 am Central time tomorrow.

"The fact that so many clients got out at a dollar does appear curious, " Peter Crane, president and CEO of Crane Data tells the MFWire.

Ameriprise asked that the Reserve liquidate the fund in a fair and equitable manner that treats all investors equally.

In a separate suit, shareholders of the beleaguered money market fund filed suit last week alleging that, in chasing performance, the fund sacrificed its stated objective of the preservation of capital.

Company Press Release

MINNEAPOLIS — September 19, 2008 — Ameriprise Financial, Inc. (NYSE: AMP) together with its wholly owned subsidiary Securities America Inc. announced today that it has filed suit in the United States District Court, District of Minnesota, accusing Reserve Management Co. of misconduct in its administration of The Primary Fund. Ameriprise has asked the court to require Reserve to liquidate The Primary Fund in a fair and equitable manner that treats all investors equally.

The suit alleges that, on the morning of September 15, Reserve's agents selectively notified a number of major institutional investors in The Primary Fund that the fund held material exposure to the securities issued by Lehman Brothers Holdings Inc., which that morning had filed for bankruptcy protection. The institutional investors were allegedly warned that the fund was at serious risk of "breaking the buck," or publishing a net asset value (NAV) below $1.

Prior to the institutional investor groups being notified of this impact to the fund, The Primary Fund held approximately $64 billion in assets. After the alleged notifications of preferred institutional investor—but before Reserve published an NAV of 97 cents on the afternoon of September 16—assets in the fund had dropped by $41 billion, to $23 billion.

Ameriprise Financial filed the suit to protect the interest of its retail investor clients. Clients of Ameriprise Financial and Securities America hold more than 300,000 accounts in The Primary Fund. The suit claims that these individual clients were not afforded the knowledge that allowed the large institutions to withdraw their funds and avoid the losses associated with a reduced NAV. The intent of the action is to encourage a fair and expeditious resolution of The Reserve situation.

As such, Ameriprise Financial is seeking a temporary restraining order barring Reserve from issuing funds from The Primary Fund to any constituent, and is seeking unspecified damages. Ameriprise Financial is communicating with the Securities and Exchange Commission, the U.S. Department of the Treasury and other regulators and legislators on this matter, and the firm is grateful for their activities to protect all investors.

About Ameriprise Financial

Ameriprise Financial, Inc. is a diversified financial services company serving the comprehensive financial planning needs of the mass affluent and affluent.

For more information, visit ameriprise.com